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Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics Are Not Evidence Ipso Facto

Journal of accounting research, 2005-09, Vol.43 (4), p.557-592 [Peer Reviewed Journal]

Copyright 2005 The Institute of Professional Accounting, University of Chicago ;2005 The Institute of Professional Accounting, University of Chicago ;ISSN: 0021-8456 ;EISSN: 1475-679X ;DOI: 10.1111/j.1475-679X.2005.00182.x ;CODEN: JACRBR

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  • Title:
    Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics Are Not Evidence Ipso Facto
  • Author: DURTSCHI, CINDY ; EASTON, PETER
  • Subjects: Accounting ; Analytical forecasting ; Business metrics ; Creative accounting ; Distribution of profits ; Earnings ; Earnings forecasting ; Earnings management ; Earnings per share ; Economic theory ; Financial management ; Frequency distribution ; Income ; Loss ; Market capitalization ; Market prices ; Net income ; Pricing ; Profit ; Profits ; Studies
  • Is Part Of: Journal of accounting research, 2005-09, Vol.43 (4), p.557-592
  • Description: We provide evidence that the shapes (particularly around zero) of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by (1) deflation (using, for example, price or market capitalization), (2) sample selection criteria that lead to differential inclusion/exclusion of observations to the left of zero versus observations to the right of zero (implicit in studies focusing on firms followed by I/B/E/S and explicit in studies partitioning on a variable differing between loss observations and profit observations), (3) differences between the characteristics of observations to the left of zero and observations to the right of zero (such as market pricing and analyst optimism/pessimism), or (4) a combination of these factors. Since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects, we conclude that the shapes cannot be used as ipso facto evidence of earnings management.
  • Publisher: Oxford, UK and Boston, USA: Blackwell Publishing, Inc
  • Language: English
  • Identifier: ISSN: 0021-8456
    EISSN: 1475-679X
    DOI: 10.1111/j.1475-679X.2005.00182.x
    CODEN: JACRBR
  • Source: Alma/SFX Local Collection
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